Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
Recently, Morningstar announced that it’s “retiring” 10-K Wizard – and it looks like ThomsonReuters could be shutting down LivEdgar (aka “Business Law Research”) soon too. That would mean that the remaining Edgar-enhanced service providers would be Intelligize, Lexis Securities Mosaic, SEC Info, Wolters Kluwer’s RbSourceFilings, Bloomberg Law’s Edgar tool, RR Donnelley’s Edgar Pro and Westlaw’s Business Law Center.
There was a healthy discussion about pricing & alternatives in Topic #8586 of our “Q&A Forum” that is worth reading if you’re scrambling to figure out what to do now. Of course, the SEC’s site is free. And as one member posted in the Forum: “Why doesn’t the SEC invest a little in EDGAR and provide some basic form filtering for investors. Would be used much more than XBRL…”
Webcast: “How to Draft Meaningful Sustainability Reports”
Tune in tomorrow for the webcast – “How to Draft Meaningful Sustainability Reports” – to hear Lou Coppola of the Governance & Accountability Institute, Kate Kelly of Bristol-Myers Squibb and Pam Styles of Next Level Investor Relations explain the keys to drafting sustainability reports that are meaningful to investors & other constituents and a “how to” list of things you should be aware of when drafting.
Audit Committees: Disclosing More about Auditor Hiring & Compensation
As described in this blog, the Center for Audit Quality & Audit Analytics recently released this year’s report about audit committee disclosure practices among the S&P Composite 1500. Key findings include:
– 25% of S&P 500 companies show enhanced discussion of the audit committee’s considerations in recommending the appointment of the audit firm, up from 13% in 2014
– Percentage of the S&P 500 disclosing auditor tenure increased to 54% in 2015 from 47% in 2014
– 16% of S&P 500 companies explicitly stated the role audit committees play in determining the audit firm’s compensation, doubling from 8% in 2014
– Disclosure of the criteria considered when evaluating the audit firm tripled among the S&P 500 (from 8% to 24%), and more than tripled among S&P MidCap 400 companies – from 7% to 25%. Disclosure of this criteria among S&P SmallCap 600 companies increased from 15% to 22%
– Disclosure of the audit committee’s involvement in engagement partner selection more than doubled for the S&P 500 – from 13% in 2014 to 31% in 2015
This report highlights just how large the difference is between the transparency in audit reports in the UK and those issued in the US. Notwithstanding recommendations of a US Treasury Committee seven years ago to the PCAOB and SEC to improve audit reports, US audit reports are of substantially less quality then those discussed in the report. Nonetheless, the report does note several shortcomings in the UK reports. The EU will require extended audit reports for 2017 annual reports for calendar year companies…
Try explaining this to your high school kid who is learning about how our government works – the House Financial Services Chair has woven a bunch of securities law bills into a transportation bill! Wha..? I’ve blogged about a number of JOBS Act 2.0 bills that have been floating around (eg. House passed 5 securities bills back in July). As reported in this blog by Anna Pinedo of Morrison & Foerster:
Chairman Hensarling offered an amendment to a transportation and transportation bill, which includes a number of JOBS Act and other capital formation related bills that had received bipartisan support. The capital formation related bills include HR 2064, the Improving Access to Capital for Emerging Growth Companies Act, HR 1525, the Disclosure Modernization and Simplifications Act, HR 432, the SBIC Advisers Relief Act, HR 1839, the Reforming Access for Investments in Startup Enterprises Act, HR 1723, the Small Business Freedom and Growth Act, and HR 1334, the Holding Company Registration Threshold Equalization Act. We previously reported on these bills.
Recently, I canvassed my advisory board for their concerns about quarterly earnings releases. Some of the pet peeves related to Regulation FD or other compliance concerns. Some were merely drafting or process issues. Here are the top 31 pet peeves (there might be some overlap but I thought it was important to couch a few of these in different ways to ensure the point was made):
1. Failure to pre-announce a scheduled earnings call.
2. Failure to pre-announce a change in the date/time of the scheduled earnings call (or merely selectively announcing the change).
3. Failure to identify forward-looking information & providing tailored cautionary language.
4. Including boilerplate cautionary language regarding forward-looking statements.
5. Including safe harbor language that has been cut & pasted from a different document and has little relevance to the forward-looking statements that actually are in the earnings release (and do not identify them adequately).
6. Including statements that say that the company “will” do something when it’s more appropriate to say they “expect” or “anticipate.”
7. Failure to update PSLRA risk factors/meaningful cautionary statements for the specific forward-looking statements that are made in the earnings release or are to be made in the earnings call.
8. Guidance/outlook that isn’t included in the earnings release; only provided orally on the earnings call.
9. No mention in the earnings release that management plans to discuss matters other than past results on the earnings call (like guidance).
10. Not remembering that there are multiple constituencies that read earnings releases. Even though earnings releases are targeted toward the investor community, they are obviously accessible to your employees, customers, etc.
11. Reconciling with your earnings release & your periodic report. Many companies provide more “color” in the release than in MD&A, which then can draw a comment from the Corp Fin Staff that you should have disclosed the same “trends” in your MD&A.
12. Missing non-GAAP reconciliation.
13. Including non-GAAP financial measures without addressing the requisite Reg G/Item 10 required information, such as not complying with Instruction 2 to Item 2.02 of Form 8-K, which states that the requirements of paragraph (e)(1)(i) of Item 10 of Regulation S-K shall apply to disclosures under this Item 2.02. This is for when the earnings release is furnished as Item 2.02 to Form 8-K.
14. Not fully complying with Item 10(e) by using the non-GAAP numbers with greater prominence & not presenting with “equal or greater prominence” the most directly comparable GAAP measure.
15. Highlighting a non-GAAP measure in the earnings release headline. This raises an unsolvable equal prominence problem since there is no way you can give the GAAP measure comparable equal prominence unless it also is in the headline.
16. Including non-GAAP measures in the bullet points, an equal prominence problem (but a more solvable one compared to headlines as you might be able to live with including the GAAP measures in the first textual paragraph before the bullets).
17. Way too many non-GAAP measures and an inconsistency from period-to-period in using them.
18. Failure to explain why certain non-GAAP measures are useful to investors.
19. Including a full non-GAAP income statement. As reflected in CDI 102.10, Corp Fin clearly does not like this.
20. Failure to update – or comply with – Item 10(e) of Regulation S-K for non-GAAP numbers. For instance, they may use non-GAAP numbers in the call and then say the reconciliation is in the release attached to the 8-K but sometimes it is not there or there is an incomplete reconciliation.
21. Incorrectly stated explanation of a change in financial metric.
22. Including text from a concurrent filing (e.g., the 10-Q or an 8-K) without conforming “the Company” to “us” or “we” (or vice versa).
23. Earnings releases that simply are too long. If it is more than a couple of pages, even for the large companies, the incremental information starts to become marginal.
24. Earnings releases that highlight only the positive news that will be published in the 10-Q. Mostly happens with development stage companies, but surprisingly there are some S&P companies that seemingly try to “manage” expectations carefully by how they structure their releases.
25. Selective emphasis in the headline from quarter to quarter to exclude any “bad news.” For example, if the company had a net loss for the quarter, the headline might say only “XYZ Reports Record Revenues” (only the good news and not any bad news). But the next quarter, if the company had income, the release would say “XYZ Reports Earnings Per Diluted Share of $0.12 in Second Quarter.” This practice becomes even more worrisome when a company uses selective emphasis from quarter to quarter when non-GAAP measures are involved, particularly when there are new types of excluded charges.
26. Comparisons between periods that are unnecessarily complex and hard to follow (e.g., “Sales for the twelve months ended September 30, 2015, were $100 million, or and increase of $10 million, or 11%, compared to sales for the twelve months ended September 30, 2014” versus “Sales for the twelve months ended September 30, 2015, increased by 11%”).
27. Statements suggesting a mere transaction signing represents the closing of the transaction.
28. Quotes from CEO or other senior managers that are “lame” and don’t add value.
29. Draft earnings releases prepared by the IR department or IR vendor that don’t match up with a draft MD&A prepared by the internal accounting/finance team. The two groups need to communicate with each other and coordinate before they send out any drafts.
30. Audit committee not reviewing earnings releases or not having adequate time to review.
31. Ignoring comments from the Legal Department or the outside lawyer who reviewed the earnings release.
This list doesn’t cover the earnings release mistakes that sometimes happens, such as hacking incidents; accidentally releasing them early or posting them online on a URL that is not so hidden. Send me your peeves!And thanks to these members of my advisory board for their input: Troutman Sanders’ Brink Dickerson; Faegre Baker Daniels’ Amy Seidel; Hunton & Williams’ Scott Kimpel (& his friends at H&W); Weil Gotshal’s Howard Dicker; Orrick’s Ajay Koduri; Maslon’s Marty Rosenbaum and Gibson Dunn’s Jim Moloney.
Spanking brand new. By popular demand, this comprehensive “Corporate Secretary’s Department Handbook” covers how to run a corporate secretary’s department, from how it’s organized and staffed to potential conflicts with other roles within the company. This one is a real gem – 30 pages of practical guidance.
ISS Data Verification Period Ends on November 13th
As noted in this blog by Ning Chiu, the ISS verification period has started – and companies have only until November 13th to review and correct the information that ISS uses to make its voting recommendations (& QuickScore calculations). Also read this Sidley memo about how ISS has updated it’s QuickScore formulas…
PCAOB’s Attempt to Inspect Chinese Auditors Collapses
This Bloomberg article gives us the bad news that the PCAOB still won’t be allowed to inspect the auditors for Chinese companies listed on US exchanges. Investors beware…
Webcast: “An M&A Conversation with Myron Steele & Jack Jacobs”
Tune in tomorrow for the DealLawyers.com webcast – “An M&A Conversation with Myron Steele & Jack Jacobs” – to hear about the latest state law developments from former Delaware Supreme Court Chief Justice Myron Steele and former Delaware Supreme Court Justice Jack Jacobs.
As illustrated by this 5-minute video of conference snippets, we really did have some fun during last week’s “Proxy Disclosure Conference” in San Diego. The 5-minute PEP Talks were well-received as they gave everyone a break from the non-stop practical guidance delivered over 20 panels. Dave & Marty performed a “pay ratio” puppet show, Liz Stoudt delivered some serious poetry slam & Wendy Davis led us all in gleeful parody song. And “Family Feud” was hosted by yours truly:
Jones Day’s Wendy Davis: The Lyrics
Here are the lyrics for Wendy Davis’ remake of “Thrift Shop” by Macklemore (this video shows the original):
Hook:
I’m gonna comp some peers
Only got $20M in my budget
I – I – I’m hunting, looking for a clawback
This is gonna be awesome
Talk to Radford cause I gotta find a reason
ISS yelled about RSUs last season
Only time based; too damn many
Investors like “Darn, you should pay him just a penny”
Rolling in, hella deep, heading to a board meeting
Show my CEO the data I’ve been tally-sheeting
Armed with my slide deck, GC standing next to me
List out our peer group: Pfizer and Fidelity
Oooooppps … but I thought those made sense!
Narrative, imperative, ending single trigger
Every year the CD&A grows bigger and bigger
Board’s unhappy, better use best practice
Independent comp committee gonna watch our …
I’m a take Mark Borges’ style, I’m a take Mark Borges’ style,
No for real, ask him, can he read my proxy?
Exec summary and some anti-hedging
Melbinger blogging about stock pledging
He said realized pay, we used realized pay
We used plain English, we cut redundancy
Hello, hello, Broc, my mello
Ain’t got fringe benefits, oh hell no!
Take some charts, make them color, and use those
ISS will be like, “But where’s the pay ratio?”
– Hook –
What you know about exec pay audits
What you know about claw-backs from profits
I’m reading, I’m reading, I’m searching thru guidance
Barb Baksa’s got the answers at the booth with the experts
Dodd Frank – they created these rules
I’m at this conference trying to get some tools
Howard Dicker, Marty Dunn and Scott Spector
Give good advice, gonna make it all better
Finance, HR, stock plan, legal
Take their data and I make it readable
Build a table with the footnotes in them
I do the edits, and we’re good with them
I think Item 402 is so damn foxy
Alan Dye’s like yo, it’s only just a proxy.
Limited edition, let’s do some addition
50 hours on a proxy that goes right in the waste bin
I need to reach my retail investors
I need to daz-zle the rigor testers
Will they think my P4P is alright?
Til the vote’s in I can’t really sleep at night
The Journal views my proxy with a microscope
Trying to get votes with repricings, no you hella won’t
No you hella won’t
– Hook –
I found the median employee in my shop
I’ll run the ratio with Mike Kesner down the block
I found the median employee in my shop
I’ll run the ratio with Mike Kesner down the block
On Friday, by a 3-1 vote, the SEC adopted its final crowdfunding rules – “Regulation Crowdfunding” is born! – in this 686-page adopting release. Humongous (and it doesn’t include this related DERA white paper analyzing unregistered offerings). We’re posting memos in our “Crowdfunding” Practice Area.
Meanwhile, as noted in this blog, FINRA has proposed the Funding Portal Rules and related forms that would apply to SEC-registered funding portals that become FINRA members pursuant to the JOBS Act and the SEC’s “Regulation Crowdfunding.”
SEC Proposes Changes to Rule 147 & Rule 504
In addition, the SEC proposed amendments to Rule 147 and Rule 504 in this 168-page proposing release. As noted in this blog, Rule 147 currently provides a safe harbor for compliance with the Section 3(a)(11) exemption from registration for intrastate securities offerings. The proposal would modernize the rule and establish a new exemption to facilitate capital formation, including through offerings relying upon recently adopted intrastate crowdfunding provisions under state securities laws – and eliminate the restriction on offers and ease the issuer eligibility requirements, while limiting the availability of the exemption at the federal level to issuers that comply with certain requirements of state securities laws.
And as noted in this blog, the SEC’s Rule 504 proposal that would increase the aggregate amount of securities that may be offered and sold in any twelve-month period pursuant to Rule 504 from $1 million to $5 million and to disqualify certain bad actors from participation in Rule 504 offerings.
Our November Eminders is Posted!
We have posted the November issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
In the wake of the announcement about the winners in my “1st Annual Proxy Disclosure Contest,” I dutifully mailed CorporateAffairs.tv t-shirts to one person at each winning company. Some of the winners were kind enough to send pics of their grand prizes:
Coca-Cola’s Jared Brandman:
Nasdaq’s Lisa Roberts:
KBR’s Vanessa Pyle:
ConocoPhillip’s David Pittman & Shannon Kinney:
Staples’ Michael Williams (courtesy of Jenn Cooney):
It’s been two years since the SEC proposed its crowdfunding rules – a long wait for those providers hoping to jump into that space – and the SEC has now noticed an open Commission meeting to be held tomorrow to adopt them. See this Forbes article – and this Crowdfund Insider article (which incorrectly states that “five” Commissioners will vote on the rule; the Commission is now down to 4 Commissioners as Dan Gallagher has moved on – even though he’s still listed on the SEC site).
At the open Commission meeting, the SEC will also propose amendments to Securities Act Rule 147 and Rule 504. Yesterday, Chair White delivered this speech on offering reform…
ISS Issues Draft Policies: November 9th Deadline
A few days ago, ISS released their 2016 policy changes for review (drawn partially from these survey results issued last month). The three US topics are: Unilateral Board Actions; Director Overboarding; and Compensation at Externally-Managed Issuers. Comments on the proposed policy changes are due by November 9th, with the final policy changes expected to be released a few weeks later on November 18th…
At our Conference here in beautiful San Diego, Bob McCormick of Glass Lewis indicated their draft policies would be out in a few weeks…
Pay Ratio: Dave & Marty Go Puppets!
For those that missed the “Proxy Disclosure Conference” on Tuesday, the seven PEP Talks (think “Ted Talk”) were a big hit – and the annual comedy routine from Dave Lynn & Marty Dunn went to the puppets! More on this – and the amazing song from Jones Day’s Wendy Davis – next week (the video archives of all these and more are now available)…
Today is the “Say-on-Pay Workshop: 12th Annual Executive Compensation Conference”; yesterday was the “Annual Proxy Disclosure Conference” – and the video archive of that Conference is already posted. Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Flash Player). Here are the “Course Materials,” filled with talking points and practice pointers.
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Pacific.
– How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list.
From time to time, the SEC reiterates its view of the critical gatekeeper role companies’ outside directors play in safeguarding investors’ interests. Nevertheless, it has been relatively rare for SEC to pursue enforcement actions against outside directors based on an alleged failure to fulfill that role. But while these actions are rare, the agency does periodically bring enforcement actions against directors whom the agency contends shirked their duties.
For example, on September 9, 2015, the agency filed civil fraud charges against Stephen Pence, the former board Chair and majority shareholder of staffing services company General Employment Enterprises. As discussed in the agency’s press release about the enforcement action, which was accompanied by a separate enforcement action against GEE’s outside auditing firm and several of the audit firm’s partners, Pence, a former U.S. attorney and former Lieutenant Governor of Kentucky, allegedly made misleading statements to the auditors involving a supposed $2.3 million certificate of deposit investment of the company. (The bank that supposedly had issued the CD had no record of the transaction.) Pence also allegedly signed GEE’s 2009 annual report despite knowing that it contained misleading statements about the $2.3 million CD transaction and other related party transactions.
Transcript: “Transaction Insurance as a M&A Strategic Tool”
We have posted the transcript for our recent DealLawyers.com webcast: “Transaction Insurance as a M&A Strategic Tool.”
Today is the “Tackling Your 2016 Compensation Disclosures: Annual Proxy Disclosure Conference”; tomorrow is the “Say-on-Pay Workshop: 12th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Flash Player). Here are the “Course Materials,” filled with talking points and practice pointers.
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Pacific.
– How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list.
Restatements: Peer Companies Mimic the Errors?!?
Here’s the intro to this blog by Cooley’s Cydney Posner:
No, it’s not from The Onion. According to a study reported on CFO.com, unless the restating company faces regulatory action or shareholder litigation, the company’s competitors may use its financial restatement as a how-to guide. The study found that, instead of driving peer companies to examine their own financial reporting to see if they need to correct for or prevent the same type of error, the restatement prompts peer companies to imitate the misreporting. The study, which covered the period 1997 through 2008, was conducted by researchers from Rutgers University, Nanyang Business School in Singapore and Columbia University.
More on our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Proxy Advisors: European Group Provides Formal Feedback Process
– Shareholder Proposals: Statements in Support Permitted
– Whether & How to Supplement or Amend Your Proxy Materials
– Member Musings on the SEC’s Proxy Season Punt
